Question

5. What are some examples of changes in the economy that would cause the labor supply curve to shift? What might shift the labor demand curve? How do these changes affect the wage rate and the employment-population ratio?

Answer 1

5.

The first example is the structural change such as change in technology, that causes labor supply curve to shift. A new technology, will make fewer workers to be eligible to work. It will cause leftward shift in the supply of labors. The second example is the increased population that makes more workers to be ready to work. It makes rightward shift of labor supply.  The third example is the migrants coming to the country. It makes number of workers to increases and a rightward shift in labor supply.

It is the increased level of labor productivity, a higher cost of acquiring capital and increased level of aggregate demand, will cause a shift in the labor demand curve. In all the three cases, there will be rightward shift in the labor demand.

A rightward shift in labor demand, will cause wage rate to increase and vice versa. A rightward shift in labor supply, will cause wage rate to decrease and vice versa. If both of these phenomenon exist together, then if demand shift is higher than the supply shift, then wage rate increases and vice versa. A rightward shift in labor demand, will increase the employment to population ratio, while a rightward shift in the labor supply will decrease the employment to population ratio.